Single family offices dodged a bullet with the Securities and Exchange Commission's final rule for the new family office exemption, writes Robert Casey of the Family Wealth Alliance. However, as family offices try to bolster their sustainability, Dodd-Frank and the SEC's revised final rule are still bad news.

Editor's Note: As part of a series gathering feedback from the industry on the new family office exemption, below is a commentary provided by Robert Casey, senior managing director for research at the Family Wealth Alliance.

Single family offices dodged a bullet with the Securities and Exchange Commission's final rule for the new family office exemption from the Investment Advisers Act of 1940. The final rule was adopted on 22 June, and was greeted with relief from many single family offices that were worried the agency's original – and far more restrictive – rule would subject them to onerous regulation.

But where regulation is concerned, half a loaf is not better than no bread at all. It's much worse than no bread at all. So let's stop celebrating for a moment, and chronicle what has transpired here.

For the first time, thanks to Dodd-Frank, single family offices are squarely in the sights of regulators. Their world has traditionally been so private and secluded that no legal definition of single family offices has even existed, and none has been needed in any case. Family offices have always been as different from one other as snowflakes, each custom built for a particular family's needs.

What has happened? We now have a formal, legal definition of what constitutes a family office from one of the most powerful of the US government's many powerful regulatory agencies. Here it follows in all its grandeur:

A family office is a company (including its directors, partners, members, managers, trustees, and employees acting within the scope of their position or employment) that:

(1) Has no clients other than family clients; provided that if a person that is not a family client becomes a client of the family office as a result of the death of a family member or key employee or other involuntary transfer from a family member or key employee, that person shall be deemed to be a family client for purposes of this section 275.202(a)(11)(G)-1 for one year following the completion of the transfer of legal title to the assets resulting from the involuntary event;

(2) Is wholly owned by family clients and is exclusively controlled (directly or indirectly) by one or more family members and/or family entities; and

(3) Does not hold itself out to the public as an investment advisor.

If your family is operating a thing such as described above, you're OK with the SEC and do not have to register as an investment advisor, assuming of course that all the clients and owners of your family office meet the SEC's definitions of family clients, family members, and family entities. (Not enough space here to provide those definitions.) If not, you have a problem, and need to talk with your lawyer.

Going forward, and for the first time, if your family is operating a thing such as described above you need an ongoing compliance program designed to retain your eligibility for the family office exemption. You can lose it inadvertently by making investments with non-family members, managing a charity funded in part by a non-family member, or committing some other faux pas. So you need to talk with your lawyer.

If you are operating a family office that is a combined effort of two unrelated families, or if you manage any partnerships or similar entities having outside investors, your operation does not qualify for the family office exemption, period. So you need to talk with your lawyer.

Notice the common thread here? Now you can begin to understand why lawyers love the Securities and Exchange Commission.

But seriously, the SEC's expanded family office exemption is a good thing only in relation to the original, more-restrictive rule proposed last fall. At a time when many family offices are looking for new options and new approaches to bolster their long-term sustainability, Dodd-Frank and the SEC's revised final rule are bad news. They reduce the options available to families and now subject them in perpetuity to regulatory constraints.